After falls in credit card balances, the worm is turning, and so I discuss the types of cards and their users, with Steve Mickenbecker from Canstar. There are a number of traps for the unwary, which enables banks to improved their profit, but at the cost of their customers. And we recommend one of the most powerful toll available for debt management!
Steve Mickenbecker is in Canstar’s Group Executive Team, bringing more than 30 years of experience in the Australian financial services industry. As a financial commentator for Canstar, Steve enjoys sharing his expertise across topics such as home loans, superannuation, insurance, mortgages, banking, credit cards, investment, budgeting, money management and more.
Go to the Walk The World Universe at https://walktheworld.com.au/
Superfund-owned bank ME has shelved plans to launch new credit cards after witnessing the success of “buy now, pay later” players like Afterpay and Zip, via Investor Daily.
The
bank posted its full-year results this week, which showed that
statutory net profit after tax fell by nearly 25 per cent to $67.1
million, down from $89.1 million the previous year. The lender recorded
$14.4 million of impairment losses in its credit card business.
ME
CEO Jamie McPhee said the bank halted its work in bringing more credit
cards to market after recognising a structural shift away from cards and
was therefore focusing its work on digital wallets.
He
explained: “Our work on digital wallets is progressing. We wanted to
bring that forward, and we’ve taken the opportunity to relook at the
credit card market, and what we’ve been seeing is that the number of
credit cards are in decline, while we’ve seen a significant increase in
the buy now, pay later entrants Afterpay, Zip, Flexi,” he said.
“We
think that the credit card market is being structurally disrupted, so
we’ve decided that we don’t think that is the right environment for the
bank to go forward in.”
Mr McPhee added that while the bank will
continue to have its low-rate credit card, it has revised its strategy
regarding a wider product range.
“We were thinking of coming to
market with a broader range of credit cards, including reward cards,
etc. but having had a look at the market, we don’t think that is the
right thing to do, strategically, going forward,” he said.
“So, that has obviously impacted the statutory earnings this time around.
“There
is no way we will be diverting our attention away from building out the
customer digital ecosystem like the digital wallets, NPP (national
payments platform), until we get that right up to a very, very market
competitive offerings.
“That will be our focus for the foreseeable focus. Anything else would be a distraction.”
It is expected that ME will be releasing its “digital ecosystem” progressively from 2020.
Brokers should be applying new credit card assessment rules to their loan applications, the solicitor director of The Fold Legal has suggested. Via The Adviser.
The Australian Securities and Investments Commission (ASIC) last year announced
new assessment criteria that is to be used by banks and credit
providers when assessing new credit card contracts or credit limit
increase for consumers.
Under
the changes, credit licensees are required to assess whether a credit
card contract or credit limit increase is “unsuitable” for a consumer
based on whether the consumer could repay the full amount of the credit
limit within the period prescribed by ASIC.
ASIC outlined last year that,
as part of the new measures, credit licensees undertaking responsible
lending assessments for “other credit products”, including mortgages,
should ensure that the consumer “continues to have the capacity to repay
their full financial obligations” under an existing credit card
contract, within a “reasonable period”.
Speaking
of the new rules, Jaime Lumsden Kelly, solicitor director of The Fold
Legal, has suggested that, while it is not mandatory for brokers, both
lenders and brokers should apply the same rules to their loan
applications.
Writing in a
blog post for The Fold Legal, Ms Lumsden Kelly elaborated: “In the past,
credit card contracts were assessed as unsuitable if the applicant
couldn’t repay the minimum monthly repayment for that limit. Under the
new rules, credit card providers must make their assessment based on
whether the applicant can repay the entire credit card limit within
three years.
“If a credit
card applicant cannot repay the full credit limit in three years, it’s
assumed that they will be in substantial hardship. This is because a
consumer who cannot afford to repay the limit within three years will
probably pay a staggering amount of interest that will take an
extraordinarily long time to repay.
“If
the applicant is in substantial hardship, the credit card provider must
decline the application as being unsuitable,” she said.
While
the rule doesn’t “technically” apply to other lenders or brokers, the
lawyer added that “all lenders and brokers have an obligation to reject a
credit contract if it would place the consumer into substantial
hardship”.
“If the
inability to repay a credit card within three years is considered to be a
substantial hardship when assessing a credit card application, how can
it also not be substantial hardship, if a consumer will no longer be
able to repay their credit card within three years because they’re
meeting new repayment obligations on a car or home loan?” she said.
Ms Lumsden Kelly gave the following scenarios as an example to illustrate the point.
In
the first scenario, an applicant with a $500,000 mortgage applies for a
$15,000 credit card. When assessing the credit card, the provider
determines that the applicant is “unsuitable” because they won’t have
enough income to repay their credit card limit in full within three
years. So the credit card provider declines the application.
However,
if the same applicant already has a $15,000 credit card and then
applies for a $500,000 mortgage (on identical terms as in the first
scenario). The licensee is only required to consider whether the
applicant can make the minimum monthly repayment on their credit card
when determining if they will suffer substantial hardship. On this
basis, the licensee approves the mortgage.
“The
end result for the applicant is the same in both scenarios,” she said.
“They have a $500,000 mortgage and a $15,000 credit card limit. So how
can we say that they are in substantial hardship in one scenario but not
in the other?
“It’s an
absurd outcome that the same person could be approved or declined for a
credit product just because they applied for them in a particular
order.”
The Fold Legal
solicitor concluded: “Over time, the courts and AFCA may seek to align
the obligations of all credit providers and brokers. In the meantime,
ASIC has said it expects all credit licensees to apply the rule to
existing credit cards by 1 July 2019.
“This
means credit providers and brokers should consider the implications of
this situation when determining how they will assess a credit card
holder’s capacity to pay and substantial hardship for other loan
applications.”
She urged any brokers unsure of how the rules affect their business or credit obligations to contact a lawyer.
Consistent with our thesis that the big tech players are well positioned to disrupt the finance sector, Apple has moved further into financial services with the launch of a new credit card for its iPhone users, at its event today. Users will be able this facility anywhere that Apple Pay is accepted.
The new credit card will give 2 per cent cash back rewards, which is
applied directly to the account for purchases made through Apple Pay but
only 1 per cent for purchases made using the physical card.
Goldman Sachs has partnered with Apple to produce the card, with Mastercard handling payment processing.
The initial launch in in the USA.
This via Fintech Business. Apple, at its ‘show time’ services event, announced the introduction of a new credit card that aims to have quicker applications, no fees, lower rates and better rewards.
Users will get a physical card but one which does not have any
information on it, instead all the authorisation information is stored
directly with the Apple Wallet app.
Apple announced that it planned to use machine learning and its Maps
app to label stores that you use and to track purchases across
categories.
Apple chief executive Tim Cook said that the card would be one of the biggest changes the credit card had seen in decades.
“Apple is uniquely positioned to make the most significant change in the credit card experience in 50 years,” he said.
Vice president of Apple Pay Jennifer Bailey said that the card builds
on the work of Apple Pay and uses the power of people’s mobile devices.
“Apple Card is designed to help customers lead a healthier financial
life, which starts with a better understanding of their spending so they
can make smarter choices with their money, transparency to help them
understand how much it will cost if they want to pay over time and ways
to help them pay down their balance,” she said.
Ms Bailey said that privacy was a big issue and all tracking information would be stored on users’ iPhones, not on Apple’s servers.
“Apple doesn’t know what you bought, where you bought it, and how much you paid for it,” she said.
Chairman and chief executive of Goldman Sachs David Solomon said he was thrilled to partner with Apple on this card.
“Simplicity, transparency and privacy are at the core of our consumer product development philosophy,” said Mr Solomon.
“We’re thrilled to partner with Apple on Apple Card, which helps customers take control of their financial lives.”
Mastercard president and chief executive Ajay Banga said the company was excited to bring global payments to Apple.
“We are excited to be the global payments network for Apple Card,
providing customers with fast and secure transactions around the world,”
he said.
ASIC has released Report 604Credit card lending in Australia – An update (REP 604), which sets out the changes being made by lenders to help consumers with credit card debt.
In July 2018, ASIC released Report 580Credit card lending in Australia (REP 580), which found more than one in six consumers is struggling with credit card debt.
The report made it clear that ASIC expects credit providers to:
take proactive steps to address problematic credit card debt and products that do not suit consumers
minimise the extra credit provided to consumers who regularly exceed their credit limit, and
allocate repayments for all credit cards in the more favourable way required for cards entered into after July 2012.
ASIC engaged with the ten largest credit providers that were part of our review (American Express, ANZ, Bendigo and Adelaide Bank, Citigroup, CBA, HSBC, Latitude, Macquarie, NAB and Westpac) and sought their commitment to change. Their commitments are described in their report released today.
Although these commitments are not required by the law, they are
important in ensuring that the credit card market works for consumers,
including vulnerable consumers.
Across the board, lenders have committed to changes to address the concerns by ASIC:
9 large credit providers committed to taking proactive steps to help consumers with problematic credit card debt
4 committed to fairer approaches for balance transfers, and
9 credit providers have committed to lower the amount by which consumers can exceed their credit limit.
Many credit providers are trialling measures — such as tailored
communications and/or structured payment arrangements — to help
consumers with potentially problematic credit card debt or who are
failing to repay balance transfers.
Others are taking a fairer approach to balance transfers, such as by
allowing interest free periods on new purchases and enhancing disclosure
about cancelling old credit cards.
Macquarie, CBA and HSBC are the most progressed with implementing
changes around credit card lending. Although American Express has
committed to some changes, other lenders have proposed more
comprehensive measures.
‘ASIC expects that all credit card lenders will address the issues
raised in our review,’ ASIC Commissioner Sean Hughes said. ‘We will be
monitoring lenders over the next two years to make sure they have taken
action to address our concerns, and to ensure that consumer outcomes are
improving in the credit card market.’
In REP 580, ASIC committed to conduct a follow-up review to see if
there is an improvement in outcomes for consumers. ASIC will also not
hesitate to use its future enforcement powers if necessary to bring
about needed changes.
Background
In July 2018, ASIC published its report on credit card lending in Australia.
ASIC’s review of credit card lending found:
In June 2017 there were almost 550,000 people in arrears, an
additional 930,000 with persistent debt and an additional 435,000 people
repeatedly repaying small amounts.
Consumers carrying balances over time on high-interest rate cards
could have saved more than $621 million in interest in 2016–17 if they
had carried their balance on a card with a lower interest rate
63% of consumers did not cancel a card after a balance transfer and a
substantial minority of consumers increased their total debt after
transferring a balance.
Since REP 580 was released ASIC has prescribed a three-year period
for credit card responsible lending assessments. This means that credit
providers must not provide a credit card with a credit limit that the
consumer could not repay within three years. This reform commences on 1
January 2019. More information about the reform is available in Report 590Response to submissions on CP 303 Credit cards: Responsible lending assessments (REP 590).
The Government has implemented other reforms to help prevent
problematic credit card debt. This includes banning unsolicited credit
limit increase invitations and making it easier for consumers to cancel
credit cards.
Consumers can also use MoneySmart’s credit card calculator to work out the fastest way to pay off their card and how much they can save by paying it off sooner.
Law firm Slater and Gordon has filed class action proceedings in the Federal Court against National Australia Bank and MLC on behalf of customers sold worthless credit card insurance.
Slater and Gordon Class Actions Principal Lawyer Andrew Paull said the action alleges MLC and NAB engaged in unconscionable conduct, in contravention of the Australian Securities and Investment Commission Act 2001 (Cth) (ASIC Act), by selling insurance to card holders who were ineligible to claim under the terms of the policy.
“All of the claimants had a NAB credit card and were then offered NAB credit card insurance,” Mr Paull said.
“However it was highly unlikely that they would benefit from this policy.
“Most were existing NAB customers and the bank should have known the insurance was likely to be of little or no benefit to them. Despite knowing this, NAB have continued to push the insurance widely, reaping millions in premiums while doing so.”
Mr Paull said most people were sold the insurance over the phone and were not given a reasonable opportunity to understand the terms and conditions of the policy.
“In the case of the life cover, the policy was of minimal value to many customers. NAB admitted as much in the Royal Commission.
“Both NAB and MLC were in much stronger bargaining positions than any of the people they were contacting and selling this insurance to.
“They have taken advantage of hundreds, potentially thousands of their loyal customers.”
Customers sold insurance included students and people without gainful employment, and people on disability pensions; all of whom were ineligible to claim the main benefits under the policy.
“Casual, contract or self-employed workers were subject to exclusions from the income protection coverage, but were not made aware of this fact when they agreed to purchase the insurance.
Jessica Purcell was a full time university student when she was pressured to take out consumer credit insurance, despite being a casual employee at the time and ineligible to claim certain aspects of the policy.
“It was sold to me like it was something that I had to take out. I honestly wouldn’t have thought twice about it if I hadn’t heard about the class action. I would have just kept paying it,” she said.
Customers with existing life and/or income protection insurance were also encouraged to take out insurance on their credit card, despite already being covered by their existing policies.
Mr Paull said Slater and Gordon believes these practices amount to unconscionable conduct in breach of section 12CB of the ASIC Act.
“We believe NAB’s and MLC’s conduct falls well short of the standard of behaviour the industry expects.
“In short they have taken advantage of people knowing that they can’t cover them.
“NAB and MLC have been fleecing consumers of millions and it’s only right that they pay it back.”
Which customers are included in the class action?
Group members include:
people who did not meet the employment criteria, eg. unemployed persons, casuals, students, seasonal workers, self-funded retirees, dependent spouses
people who were employed by their family
people who were self-employed
people with a pre-existing medical condition, or critical illness
people who were otherwise ineligible to claim one or more of the main benefits of the policy
people who were otherwise highly unlikely to require, or be able to benefit from the policy, such as people who held effective income protection policies
Following consultation, ASIC has set a three-year period to be used by banks and credit providers when assessing a new credit card contract or credit limit increase for consumers.
From 1 January 2019, under the revised responsible lending obligations, a credit card contract or credit limit increase must be assessed as unsuitable if it is likely the consumer would be unable to repay the credit limit within this period. The three-year period will apply to all classes of credit card contracts.
ASIC has prescribed a three-year period to strike an appropriate balance between:
preventing consumers from being in unsuitable credit card contracts, and
ensuring that consumers continue to have reasonable access to credit through credit card contracts.
In July 2018 ASIC released Consultation Paper 303 Credit cards: Responsible lending assessments (CP 303), which outlined the proposal to prescribe a period of three years for responsible lending assessments. The consultation paper suggested this period would apply to all classes of credit card contracts.
In REP 590 ASIC provides further guidance on the assumptions that should be made when assessing whether a consumer can repay the credit limit within three years. This includes guidance on:
fees on credit card accounts
interest rates charged on credit card contracts held with other credit providers, and
the effect of the reform on responsible lending assessments for other credit products.
The new legal requirement commences on 1 January 2019. Credit providers are expected to have systems in place to ensure that that they can meet the new obligations.
The revised obligations will apply to licensees that provide credit assistance and licensees that are credit providers for both new credit card contracts and credit limit increases under existing credit card contracts. ASIC will monitor the prescribed period and our guidance to ensure that it is achieving the goals of the reform.
Background
In March 2018 the Government implemented reforms in response to the Senate Economics References Committee report relating to credit card interest rates. As part of the reforms, responsible lending obligations were amended to require that a credit card contract or credit limit increase must be assessed as unsuitable if it is likely that the consumer would be unable to repay the credit limit within a period prescribed by ASIC.
The purpose of this reform is to make sure that consumers can afford to repay their credit card debts within a reasonable period. Consumers will still retain the flexibility to make low minimum repayments on credit cards.
In July 2018 ASIC released Report 580 Credit card lending in Australia (REP 580), which contained our findings that more than one in six consumers are struggling with credit card debt, and that lenders could do more to take proactive steps to address persistent debt, low repayments or poorly suited products. We also found that in the 12 months to June 2017, $621 million could have been saved if consumers who regularly incur interest charges had used a lower rate card.
In REP 580 ASIC flagged that it would publicly report on the credit providers who do and don’t respond to the findings and this will occur later in 2018.
ASIC received 15 submissions in response to CP 303. ASIC thanks the people, businesses and associations that took the time to provide comments on our proposal.
Kwok (A Co-Founder of Finty), David & Andrew Boyd.
Credit Card Compare does what it says on the tin, by providing a website for prospective credit card customers to select and compare the features and benefits of a wide range of Australian credit cards. In fact, the business, which started in a domestic setting a decade ago has thrived, and now has around 150,000 people seeking advice each month via the site.
When customers get a card approved from the bank, they receive a referral fee but do not handle the application or credit assessment processes, so Credit Card Compare is essentially a lead generating platform for lenders. The trick of course is to get current data passed back from the banks and David said that given the legacy systems in some organisations, this can be a challenge. They have some additional enhancements in the works, which we will see down the track. As yet they do not provide advice on which card is best, but simply make it possible for consumers to compare cards on a range of standard parameters and prioritise the features which they believe are most important.
The announcement of Credit Card Compare’s acquisition of Singapore based start-up, Finty.com highlights their desire to reach out and expand into selected Asian markets. Singapore has a unique credit card market, in that as well as card applicants being enticed with cash back, rewards and points, Finty enriches the rewards they receive, and as a result has a significant footprint in the market, despite relatively modest numbers of applications. In that market, customer rewards for taking a card are paid once approved, and most card holders possess a battery of separate cards for different purposes, for example, travel, expenses, and shopping. The average Singaporean would somewhere between six to eight cards, a much higher number than in Australia where most people only have one or two cards.
David sees significant growth potential across Asia, and also potentially some leverage from Finty.com back into the Australian business, seeing a win-win between the two businesses, with niche expertise from Singapore paired with executional capability in Australia.
Given the release of the ASIC report into Credit Cards, where they underscore the fact that many households have the wrong cards for their purchase and repayment behaviour, it seems to me that Credit Card Compare is well placed to bring greater sophistication into the local Australian market, whilst growing across the region. A nice trick to pull off if they can do it.
